Simple Minded Investor

As often happens when the markets are bouncing up and down, some people are turning to the "safe haven" of gold. But how safe is gold? Gold has several attributes that make it attractive: 1) Gold is durable. In fact, some of the gold you buy today was probably mined by the Inca's thousands of years ago. 2) Gold is universal. With very few exceptions, gold always has value. This is true historically. And no matter where you go today you can likely trade gold for other goods either directly or by converting it into the local currency. 3) Gold is portable. While heavy, gold packs a lot of value in a small package. 4) Gold is beautiful. You can store it as jewelry or other decorative art. So if you are looking for an investment that will last a 1000's of years and still hold value, gold is a great commodity. Or if you are looking for something that will be likely to survive a complete societal breakdown like a war. However, when you start to look at likely fin...

You aren't smarter than the market. It really is that simple. You know the marketing folks have been out talking when the New York Times does a fluff story on some new way to make more money with your investments. So watch out for the new scam promoted by the same media advisers who told you a few years ago to buy the most expensive house a lender would finance. Paul Sullivan story is about people'e successful investment of their retirement money in real estate using a self-directed IRA. He provides us with several "success stories".  Of course they are all recent converters to this idea and, not surprising, all but one of the people whose story Sullivan tells are also in real estate sales. The problem isn't really Paul Sullivan. Its that there is no one who makes money by digging out the horror stories from people who invested their retirement funds in real estate at the height of the housing bubble. There aren't any public relations firms devoted to de...

The Minneapolis Star-Tribune financial advice columnist, Chris Farrell has an article in the Sunday May 1, 2011 edition that epitomizes the results of over-simplified financial analysis. For some reason, most of the media's financial advisers seem intent on ignoring the complexity of comparing Roth and IRA contributions and the result is often poor advice. Let's take a look at the media's conventional wisdom and how it compares to reality. Most media financial columnists will say that an IRA and a Roth contribution are equivalent assuming that your tax rate is the same on both ends. If you expect your taxes to be lower in retirement, then the IRA will give you a better return. If not, then the Roth is probably a better investment. On one level this is accurate. If you put $100 into a Roth IRA and are in the 25% tax bracket, you will have spent $125 including the taxes. Lets assume your investments break even over the next ten years and then you withdraw the balance of the...

You aren't smarter than the market. It really is that simple. A few years ago, in October 2008 right after the market "crash", I did a post on confusing volatility and risk . Yesterday an article on CNN Money in their "Ask the Expert" column made it clear that confusion about the risk of volatility extends to the media who provide advice on personal finances. You can read the column for details. But the short version is that someone approaching retirement asked for advice on changing the balance between different assets in their retirement accounts to reduce its overall risk. Specifically they wanted to know " Should we rebalance all at once or slowly over time?" The columnist response was all at once. His argument was " by transitioning to the new asset mix over time, you're really postponing (or perhaps more accurately, undermining) your decision to re-set the risk-reward balance in your portfolio. " This is just plain bad advice. ...

There is a media narrative out there about the T-party that it is made up of people who are angry because they lost their jobs or fear losing their jobs. The actual demographics of T-party supporters don't really reflect this at all. Instead, the typical T-party adherent is male, moderately well to do and in his 40's. Of course, not all fit that demographic. But far from being "trailer trash" as some people imagine, the T-party folks have been relatively successful. So why are they angry? Because they fear life is getting worse, rather than better. And they, as individuals, react psychologically to their fears by getting angry, as opposed to other extreme of going to bed and pulling the covers over their head. But to focus on the causes of their anger, which are mostly personal psychology, is to ignore the causes of their fear. Of course, we can't expect politicians or the media to address those causes. Success in politics requires validating that fear and anger...

As I discussed in Friday's article , there is a concerted political campaign to "wean us off" social security, as one of the program's congressional opponents put it. Central to that campaign is the notion that the program is going "bankrupt" and future generations will not receive any benefits. While that argument has little merit, there is some reality to the underlying problemt. Lets look at the reality. The real problem facing Social Security is demographic. That huge group of baby boomers born after World War II is approaching retirement. This means they are ready to leave the workforce and start collecting social security. That demographic bubble means more people will be receiving benefits and relatively fewer people will be paying for them. This problem has been anticipated for a while. The solution hit on 25 years ago was to switch to having current workers pay more in social security taxes than the costs of paying benefits to current retirees. Th...

The current media narrative is that "social security" is not reliable. It has gotten to the point that this urban myth has become an accepted part of unrelated discussions of retirement. Here is one on article on retirement planning that is an example. This repeated media driven mantra has lead many young people to adopt the attitude that, as one told me 15 years ago, "I don't expect to get any social security." But in fact that is wrong. Even once the social security trust fund is gone in 30 years, continued revenue is expected to cover at least 75% of the projected benefits. And even that is based on projections that assume US workers wages will continue to represent a declining proportion of any increases in productivity. And reducing benefits to 75% of those promised is only one of many options, if in fact social security taxes don't cover all the promised benefits. The reality is that for many people Social Security is the ONLY reliable leg of the stoo...